• It’s been a tough 2.5 weeks to be long on oil. After reaching a 2016-high at $51.93 on October 19th WTI lost $7.56 through November 3rd bottoming out at $44.37. We currently see three causes of the oil market’s selloff believing that 1- skepticism regarding OPEC’s ability to reach and enforce meaningful supply cuts, 2- a bearish EIA report this week including the largest weekly inventory build on record and the highest amount of imported oil since 2012 and 3- cascading liquidation of a significant long position held by speculators are together responsible for market weakness. Our current view still calls for a $47-$55 range heading into the OPEC meeting later this month and we see several reasons why oil should find its footing and potentially rebound in the near term.
• As for trading flows, it was clear that length liquidation by speculators due to OPEC deal skepticism was responsible for a significant amount of flat price damage this week. After flushing out a considerable amount of ‘weak’ length and moving prices below $45 we think that sentiment should turn more moderate with hedge funds hesitant to hold aggressively short positions in the low $40s heading into an OPEC meeting with non-zero odds of producing a bullish shot to the market.
• In terms of fundamentals we think this week’s EIA report (and more specifically its 9m bpd in imports) was a one-off event due to tanker flows and not indicative of a newly bearish turn in supply data. Broadly tightening global refined product stocks (our chart to the right shows ARA Fuel Oil stocks lower by 50% y/y,) improved refining margins which have flipped in some markets from seasonal laggards to above-normal seasonal yields and more than 1.3 million bpd of expected US refiner demand growth in the coming weeks as facilities emerge from turnarounds should all help to maintain the newly higher floor in the oil market.
• Lastly, in the geopolitical realm we view current output increases from Libya and Nigeria (who had m/m output jumps in October of 180k bpd and 170k bpd, respectively) as fragile ground to build a bearish case on while output gains from Iraq and Iran are expected to plateau in the not too distant future. Libya’s anarchical violence and harshly competing militia interests in oil export assets are a persistent bullish risk to the market. Further south, Nigeria’s ceasefire has yet to create any common ground between the government and the Niger Delta Avengers and this was fully on display this week as the NDA attacked a NNPC pipeline and refused to represent themselves at peacemaking talks between the government and other Niger Delta groups they deemed corrupt.
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Spreads collapse under OPEC, EIA report
US producer data was mixed this week beginning with a slight uptick in the producer/merchant short position held in NYMEX WTI and the first reduction in active US rigs (a modest cut of 2 rigs w/w) since June. US crude production hit 8.52m bpd in this week’s EIA report which is its highest mark since August. The WTI Cal’17 strip fell below $48.50 this week which is unlikely to generate any producer hedging in the near term.
WTI spreads stayed in a bearish pattern this week with help from a flood of imported crude into the US, a modest inventory build in Cushing and OPEC deal jitters which were particularly harsh on the front of the curve. WTI Z16/H17 traded to a low of -1.92 on Thursday finding support on that level for the fifth time since October 24th. 2H’17 spreads were also hit hard and WTI M17/Z17 sank from -1.00 on last Friday to -1.62 on Thursday afternoon. In both cases we think that accelerating refinery inputs in line with seasonal norms and improving margins should help stop the bleeding and moderate further losses. CSO volumes were mostly concentrated on bearish structures this week but skew in spread options is still essentially flat. As of Thursday afternoon the 25-cent out of the money put and 25-cent out of the money call in WTI J7/K7 were both worth roughly 11 cents.
Bloomberg released their OPEC production estimates for October this week and the results were unsurprisingly bearish. The cartel pumped a new record high 34m bpd in October (+170k bpd m/m ) lead by gains in Iraq, Iran, Libya and Nigeria who combined to increased production by 450k bpd. Angola lead declines with a 230k bpd drop to 1.5m bpd. Saudi Arabia’s output declined by 20k bpd to 10.58m bpd which is a seasonal norm as a/c use declines and not indicative of a willingness to cut production to raise prices. Russia also increased production by 100k bpd m/m to 11.2m bpd.
Brent spreads also fared poorly through Thursday from F17 – Z17 as heightened output from Iraq, Libya and Nigeria crowded already well supplied markets in the Atlantic. In the front of the curve Brent F17/H17 fell to a low of -1.62 on Thursday for a $1.25 loss since June while further back in the curve M17/Z17 dropped to -1.75 for a $1 loss in the last two weeks.
Funds remain bullish RBOB, lukewarm on oil
COT data for last week showed modest liquidation of length from speculators in WTI and Brent. WTI net length fell from 291k to 268k due to an equal liquidation of longs while gross short positions were flat. In ICE Brent net length fell by 25k on an 8k increase in gross short positions while gross longs were cut by 17k. Our assumption is that the next round of data will show a signficant liquidation of long positions due to the sharp move lower in flat price.
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In product markets funds made a slight addition to their net long position from 40k to 41k after carrying a net short position as recently as August. In heating oil the net long grew from 8k to 12k. USO flows have been flat over the last two weeks after modest outflows in the week ended October 28th. Net outflows for October currently stand at $410 million which was the largest sell effort in the ETF since April.
Selloff drives 1-month high in volatility
WTI’s fall from just under $52 to $45 drove a steep move in the OIV from 33% to over 41%. In WTI markets H17 at-the-money volatility jumped to 38% as of Thursday for a 4-vol w/w increase. The options skew also became increasingly bearish due to directional stress as 25 delta puts pushed to 42% while 25 delta calls priced at 35%. We continue to see it as a bearish signal the 10 delta calls remain as the cheapest option across the curve. Going forward, we would expect a modest rebound to cause implied vols to compress as realized volatility (20-day) is still below 27%.
Import flood drives highest w/w crude build on record
• Crude oil inventories added 14.4m bbls w/w on a flood of imports into the USGC and West Coast. The overall jump in imports of over the course of the week – 13.9m bbls- was almost entirely responsible for the unprecedented inventory increase. Total imports at just shy of 9m bpd were the highest since 2012.
• Cushing stocks were essentially unchanged at 58.5m bbls
• Refiner demand took a slightly surprising dip to 15.4m bpd
• Gasoline and heating oil inventories continue to trend towards y/y deficit following large weekly inventory declines
US crude oil inventories jumped 14.4m bbls w/w and are higher y/y by 7%. Regionally, PADD I stocks drew by 162k bbls (+16% y/y,) PADD II stocks added 2.7m bbls (+5% y/y,) PADD III stocks added 8.1m bbls (+9% y/y) and PADD V stocks added 3.1m bbls (-5% y/y.) An increase in imports of about 2m bpd represented about 97% of the weekly supply build as PADD I imports increased by 2m bbls w/w, PADD II imports jumped by 2.3m bbls w/w, PADD III imports jumped by 6.3m bbls on the week and PADD V imports increased by 3.1m bbls. Crude oil production at 8.52m bpd was its highest mark since August.
Refinery inputs had a somewhat disappointing w/w drop of 100k bpd to 15.45m bpd. Overall inputs are flat y/y over the last month and should be set to increase by more than 1.3m bpd in the next 4-6 weeks. Refinery utilization at 85.2% was basically flat w/w and is lower y/y by 2% over the last year. Refining margins on the east coast got a boost from issues on the Colonial pipeline with RBOB/Brent jumping to nearly $13/bbl. The WTI 321 crack was in line with seasonal norms near $16/bbl this week while gasoil/brent lagged near $11/bbl.
Product markets weaken despite Colonial explosion and inventory draws
Gasoline stats were more bullish than expected lead by an overall draw of 2.2m bbls and a 1.9m bbl weekly draw on the east coast. Overall gasoline inventories are higher y/y by just under 4%. PADD II stocks are +8% y/y following a 1.7m bbl draw and PADD III inventories are higher y/y by 7% after a 1.8m bbl weekly build. PADD IB inventories are lower y/y by 6% following a modest weekly draw. On the demand side domestic gasoline consumption at 9.2m bpd was flat w/w and is flat y/y. Exports at 800k bpd are higher y/y/y by more than 80%.
RBOB futures were extremely erratic to begin the week registering a short lived print at $1.64/gl (5-month high) in response to another explosion at on the Colonial Pipeline disrupting product deliveries to the east coast. In spread markets RBOB Z16/H17 traded to a contract high to nearly +10 cpg. In both markets the panic driven buying was short lived as futures ultimately trended lower on the week near $1.45/gl on Thursday while RBOB Z16/H17 fell more than 9 cents off of its high print to near +1 cpg.
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US distillate stocks decreased by 1.8m bbls w/w which was concentrated in PADDs III and V. Overall distillate stocks are higher y/y by 7% and PADD IB inventories are higher y/y by 8% following a 720k bbl build. PADD II inventories are now higher y/y by 22% and PADD III inventories are lower y/y by 7%. Heating oil demand continued to disappoint this week with domestic consumption at 3.9m bpd for a 200k bpd w/w drop. Domestic demand is lower by 3.6% y/y over the last month while exports at 1.1m bpd are lower y/y by 2%.
Heating oil traded in a more bearish pattern than gasoline this week enjoying a jump from $1.50/gl to $1.58/gl on the Colonial explosion before selling off all the way down to $1.46/gl by Thursday. Prompt heating oil futures are lower by 17-cents from their high print in October. In spread markets HO Z16/H17 jumped from -4 cpg on the Sunday open to a high print of -1 cpg before taking out Friday’s settle to the downside and trading near -4.25 on Thursday.
Overseas, gasoil spreads were generally weaker in the front of the curve including Gasoil Z16/H17 which traded below -$12/t this week for the first time since September before rebounding towards -$11/t. ARA gasoil stocks printed a modest w/w build this week but are lower y/y by 16%. Distillate stocks in Singapore fell by 1.5m bbls w/w and are lower y/y by 3%.
By SCS Commodities Corp.
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